Best of the Week
Most Popular
1.Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - Harry_Dent
2. Is This How World War III Begins, In Almost Complete Silence? - Jeff_Berwick
3.Trump Wins 2nd Presidential Debate, Betfair Betting Markets Odds Bounce - Nadeem_Walayat
4.Why Krugman, Roubini, Rogoff And Buffett Dislike Gold - GoldCore
5.End of SPX Stock Market Correction Nears - Tony_Caldaro
6.Get Ready for the Future - Exponential Machine Intelligence Mega-trend towards Singularity - Nadeem_Walayat
7.US Housing Market Bubble II – It’s Happening Again! - Andy_Sutton
8.FTSE BrExit Stock Market Panic Crash Resolves towards New All Time Highs - Nadeem_Walayat
9.Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - Nadeem_Walayat
10.Gold’s, Miners’ Stops Run - Zeal_LLC
Last 7 days
Inflation About To Explode Higher - 22nd Oct 16
Still waiting for SPX uptrend to kick off - 22nd Oct 16
Will a Rising US Dollar Crush Gold’s Fledgling Bull? - 22nd Oct 16
Why The Global Economy Will Disintegrate Rapidly Back to Olduvai Gorge - 22nd Oct 16
GLD Bleeds Out; Weekly Gold Update - 22nd Oct 16
Stock Market Investment Success Through the “Investment Rule of 72” - 21st Oct 16
The Final Bottom in Gold - WHEN - 21st Oct 16
Gold Green Lights Upleg - 21st Oct 16
Demand for US Mints Silver Eagles has ‘Returned with a Vengeance’ - 21st Oct 16
Central Bankers Can't Stop The Death Blow Of The Post US Election Recession - 21st Oct 16
The Fortune at the Bottom of the Pyramid: Golden Opportunity for Frontier Asia - 21st Oct 16
Have You Taken These 4 Simple Steps to Improve Your Trading? - 21st Oct 16
The Stock Market is an Accident Waiting to Happen - 20th Oct 16
It's Rally Time for Gold and Silver Equities - 20th Oct 16
Cashless Society – Risks Posed By The War On Cash - 20th Oct 16
China's insane Housing Market Will Tumble and Crash in 2017 - 20th Oct 16
Donald Trump Bounces Going into 3rd and Final US Presidential Election Debate - 20th Oct 16
Attention Please: Phase Two of the Gold and Silver Train Now leaving the Station. All Aboard? - 19th Oct 16
How to Successfully Trade a Stock Market Crash - Black Monday October 19th 1987 - 19th Oct 16
Tesla, Apple and Uber Push Lithium Prices Even Higher - 18th Oct 16
Silver, Debt, and Deficits – From an Election Year Perspective - 18th Oct 16
UK Property Market: Slow Growth Does Not Equate To Decline - 18th Oct 16
Trump Election Victory is in Your Power - 18th Oct 16
Stock Market More to Come! - 18th Oct 16
This Past Week in Gold and Silver - 17th Oct 16
A Falling Stock Market Cannot Be Allowed - Financial Repression Is Now “In-Play”! - 17th Oct 16
Commodities, Forex and Stock Market Trend Forecasts - 17th Oct 16
Stock Market Crash..or No Crash? - 17th Oct 16
A perspective on risk rally – Risks abound but Stock Market is Confident - 17th Oct 16
Bank of England Blames Brexit for Sterling Drop Inflation, Masks QE Money Printing Cause - 17th Oct 16
From Piety to Pride to Pity, America's Racial Divide - 17th Oct 16
Is Obama Juicing US Government Spending To Get Hillary Clinton Elected? - 16th Oct 16
Seek Your Independence: Anything Else Will Destroy You - 16th Oct 16
SNL - US Presidential Debates, 1st, 2nd, VP - Like You've Never Seen them Before! - 16th Oct 16
End of Economic Growth Sparks Wide Discontent - 16th Oct 16
Donald Trump on Life Support, May Abandon Election Campaign and War on Republican Party - 15th Oct 16
The Gold Manipulators Not Only Will Be Punished, They Have Been Punished - 15th Oct 16
Black Votes Matter - Is the US on the Verge of Mass Race Riots? - 15th Oct 16
Gold Stocks Screaming Buy - 14th Oct 16
Brace Yourself for the Quadrillion-Dollar Reckoning - 14th Oct 16
The Next Recession Will Blow Out the Budget - 14th Oct 16
John Mauldin: My Infrastructure Plan to Save the US Economy - 14th Oct 16
World War III On The Brink: War Will Continue Until It Triggers Economic Collapse - 14th Oct 16
US T-Bill Rejection At Ports In Progress - 14th Oct 16
These 2 Debt Instruments Pose Peril to Millions of Investors - 14th Oct 16
China’s Rocketing Housing Market Real Estate Bubble - 14th Oct 16
DIY Winter Home Maintenance Money Saving 22 Point Checklist to Get Ready for Winter/Fall - 14th Oct 16
US Stock Market, Big Picture View - 13th Oct 16
Stock Buybacks Main Force Driving Bull Market; Rewards Investors and Starves Innovation - 13th Oct 16
SPX Gapping Down... - 13th Oct 16
Syria - Obama Stepped Back From Brink, Will Hillary? - 13th Oct 16
The Structure and Future of Gold in the Investment and Monetary World - 13th Oct 16
Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - 12th Oct 16
Gold and Crude Oil - General Stock Market Links - 12th Oct 16
Samsung's Galaxy Battery Just The Tip Of The Iceberg - 12th Oct 16
Hillary: Deceit, Debt, Delusions (Part Two) - 12th Oct 16
Gold and Silver Metals Show Strength Relative to the USD Index - 12th Oct 16
Announcing Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 12th Oct 16
Confirmed Stock Market Sell Signals - 11th Oct 16
Hillary Deceit, Debt, Delusions - 11th Oct 16
Trump Support Crashes to New Low of 6.4 on Betfair Odds Betting Market - 11th Oct 16
The World Is Turning Dangerously Insular - 11th Oct 16
An American Tragedy: Trump Won Big - 11th Oct 16

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

LEARN to Trade

U.S. Economy Heading For the Rocks?

Economics / Recession 2008 - 2010 Jun 14, 2010 - 03:43 AM GMT

By: Gerard_Jackson


Best Financial Markets Analysis ArticleIf you read Reuters, Associated Press and the rest of the phony news outlets the US economy is on the mend and it's only a matter of time before happy days are here again. If you are one of the unemployed or underemployed things are indeed gloomy. And no wonder. The Wall Street Journal reports that in the first quarter not one venture-backed company went public. This hasn't happened since 1980. Adding to the economy's woes we find that of the 431,000 non-farm jobs created last month a mere 41,000 was in the private sector, less than 10 per cent. To top it off, manufacturing also started to slow.

So much for the wonders of big-spending government and its regulatory chains. Only now are some politicians waking up to the fact that the Sarbanes-Oxley legislation might be amounting to a massive ball and chain that is holding back an entrepreneurial led recovery. Making matters worse is Obama's impending blizzard of regulations and the accompanying paperwork that will swamp small and medium size businesses. If that's the economic anvil the coming tax increases will be the hammer. This is not a good time to be a small American businessman.

A while ago I pointed out that so long as there was sufficient capital and land to employ people there cannot be permanent widespread unemployment in a free market. Some Readers are demanding to know that if this is right then why is unemployment so high? Because in America the free market is being badly crippled -- and it's getting worse. The Democrats have no understanding of free markets nor do they care to obtain any. Their ultimate aim is not sustained economic growth -- without which there is no prosperity -- but sustained economic power for themselves, irrespective of the cost to the country. The massive spending programs and their contempt for the electorate is ample evidence of that fact.

Given this situation is it any wonder that the American economy appears to be heading for the rocks? But as any seaman will tell you the most dangerous rocks to navigate are always those below the surface. The same can be said of the US economy. What bothers me -- and it applies to all other economies -- is not dismal economic indicators but the dismal level of the economic knowledge of millions of Americans. Although the great majority instinctively lean to free enterprise it cannot be denied that leftist thinking has greatly influenced public opinion.

This is why so many Americans can favour more controls on business while still favouring free enterprise. They have yet to see that this amounts to saying business needs to be increasingly chained in order to make it freer and more efficient. Needless to say, there will always be an ample supply of what Adam Smith aptly called "that insidious and crafty animal, vulgarly called a statesman or politician" to encourage this misguided line of thinking.

And this is what we are really facing: misguided thinking. Right across the intellectual spectrum we find ancient economic nostrums being flaunted as deep economic insights that can restore prosperity if only the state had the will to implement them. One of these nostrums is that government spending is the true road to recovery. It isn't and it never was. Pushed too far government spending can actually destroy an economy.

Robert Reich is Professor of Public Policy at the University of California at Berkeley and an excellent reason why you should keep your children away from a university. Recessions always bring forth an abundance of economic cranks and he is no exception. Unfortunately much of what he has to say can be found in the standard textbook. He stated on his blog that:

Why are we having such a hard time getting free of the Great Recession? Because consumers, who constitute 70 percent of the economy, don't have the dough. They can't any longer treat their homes as ATMs, as they did before the Great Recession.

This used to be called the underconsumption fallacy and was rightly treated with contempt by the classical economists* who understood what the great majority of contemporary economists apparently cannot: and that is that production pays for itself. In other words, demand springs from production, meaning that the means to produce always supplies the means to buy. Supplies constitute demands, as they used to say in the nineteenth century.

The only time this relationship appeared to breakdown is when, as the older economists put it, production was deranged. This was the result of investment expanding disproportionately to consumption, and was considered a monetary phenomenon. Unfortunately in the 1840s the early wisdom was superseded by what one might call the Wilson-Mill "irrational exuberance" theory in which the monetary component dropped out of sight. This was followed in the 1930s by the even worse Keynesian theory. And now look where we are.

But it goes without saying that Reich's opinion is not only plausible but self-evident. Is it not a fact that consumer spending makes up about 70 per cent of GDP? Yes it is. However, GDP is not a true measure of total economic activity because it omits intermediate spending on the spurious grounds that to include it would amount to double-counting. But once we do include it consumer spending drops to about one-third of total spending, indicating that business spending is what really drives the economy.

Focusing on the 70 per cent statistical fiction leads to the conclusion -- though it is rarely if ever stated -- that the US is a two-stage economy: the production stage and the consumption stage. Even on the surface this is a ridiculous view. No one denies that production takes place in stages and through time. What is being overlooked by the mass of today's economists is the enormous ramifications of this fact, one of which is that encouraging consumer spending can retard recovery and weaken production. There was a time when this fact was never a matter of contention. During the Great Depression it was noted:

The larger number of payments is not from consumers to producers, but is made between producers and producers, and tends to cancel out in any computation of net incomer of net product value. "In fact, income produced or net product is roughly only about one-third of gross income." [Italics added]. What is cost for one producer is in part income for some other producer, but part of that income the latter has to pay out in costs to other producers in another stage of the productive process (for intermediate products, raw materials, supplies, etc.), and so on. All that is necessary in order that equilibrium be maintained is that consumers' incomes equal the cost of producing consumers' goods; the total of producers' payments necessarily exceeds that of consumers' incomes. (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle, Macmillan and Company 1937, p. 71).

In English so plain that even Mr Reich can understand it: consumer incomes are always exceeded by total expenditure on production. If Reich and the rest of the economic commentariat were right every economy in the world would be permanently and irredeemably depressed because there is no way that consumer incomes can ever equal or exceed total production costs.

If the public had -- or at least the country's economic pundits -- a far better understanding of how the economy functioned Obama's destructive economic policies would never have got off the ground.

*Malthus can be considered the exception, though in his later years he paid far less attention to the problem of depressions. His writings on the question of universal gluts conveyed to me the impression that he failed to fully grasp what proponents of what became known as Say's law were actually saying. See Say's Letters to Malthus as well as Ricardo's defence of Say's law.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2010 Gerard Jackson

Gerard Jackson Archive

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife